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IS/IT As A Corporate

Resource



Dekar Urumsah MIS 2

• The value of IS/IT to an organisation

• Resource Based View Of IS/IT

• Understanding and determining IS/IT Costs

– What constitutes IS/IT costs

– Evaluating IS/IT investments

– Justifying new investments in IS/IT

– IS/IT cost recovery methods• Understanding and determining IS/IT Benefits

Overview



Dekar Urumsah MIS 3

• Four key [theoretical] benefits of IS/IT in an

organisation (Mckeen and Smith, 1996)

– Better cost management

– Improved productivity

– Improved risk management

– Better customer management

Value Of IS/IT To An Organisation



Dekar Urumsah MIS 4

Value Of IS/IT To An Organisation

• Other demonstrable benefits include;

– Operational Support

– Tactical Support – Identification of historical trends

– Support for new strategic ideas.

• Accumulated IS/IT assets reflect the value of previous IS/IT expenditure



Dekar Urumsah MIS 5

Value Of Information Derives From

• Accuracy

• Quality

• Usability

• Flexibility

• User satisfaction

• Reliability

• Relevance

• Productivity

• Security

• Profitability

• Speed

• Volume

Thus it is difficult to place a dollar value on

the information asset of an organisation



Dekar Urumsah MIS 6

Increasing Use Of IS/IT



Dekar Urumsah MIS 7

Use Of IS/IT In Australia(1999-2000 Business Technology Survey)



Dekar Urumsah MIS 8

• Computer use has continued to grow fairly steadily,

rising from 49% of businesses in 1993/94 to 63% in

1997/98 and 76% in 1999/2000.

• Between 1997/98 and 1999/2000, the proportion of

businesses with Internet access almost doubled (29%

to 56%) while the proportion with Web sites or homepages more than doubled (6% to 16%).

Use Of IS/IT In Australia(1999-2000 Business Technology Survey)



Dekar Urumsah MIS 9

• Exactly how much are we really spending on IS/IT?

• What value [if any] are we getting from this investment?

• How do we evaluate IS/IT investments

• Why do IS/IT costs continue to rise when unit costs are

falling?

• How can we regain our belief in IS/IT returns?

Robson (1997)

Common Concerns…



Resource Based View Of

IS/IT



Dekar Urumsah MIS 11

• Derived from strategic management

literature

• Originally proposed by Jay Barney (1986)

and later developed in a seminar article in

1991

• RBV theory suggests that a firm consists

of unique resources that the firm uses to

compete in its market

Derivation Of RBV




• Value – Resources are valuable and must have capacity to

improve efficiency/effectiveness

• Rarity – Resources are strategic to the extent that they are

rare and demand is high

• Imperfectly imitable – Must be difficult for competitors to imitate

• Substitutability – A resource can be rare and in-imitable, but it is not

strategic if it can be easily substituted by competitors

Resources Characteristics




• Heterogeneity;

– No two organisations will have the same

resource base/structure

Resources Characteristics




• Classified as “Capital”

• Four categories

– Financial

– Physical

– Human

– Organisational

Categories Of Resources




TechnologyPeople

IS/IT Unit structure

Information/data/

Knowledge

Financial

Physical

Organisational

Human

RBVIS/IT

Maps to

IS/IT and RBV



Understanding AndDetermining IS/IT Costs




Computer Management

Capital InvestmentInformation Management

Operating Expense

PARADIGM SHIFT

Cost Focus

Value Focus

Changing Views Of IS/IT Costs




IS/IT Spending as an expense IS/IT spending as an investment

Small sums of money Large sums of money

Operational/tactical view of benefits Strategic view of benefits

Must we spend on this? We must spend on this!

Discontinuous discrete spending Continuos investment

Cost analysis Investment appraisal

Self financing by cost saving in

other areas

Capital planning

“Manage the cost” focus “Manage the benefits” focus

Expense accounting techniques Asset accounting techniques

Changing Views Of IS/IT Costs




• IS/IT costs are made up of both

– Tangible (or visible ) and

– Intangible (or hidden ) costs

• Difficulty in estimating IS/IT project costs resultsin;

– Lack of confidence in IS/IT

– Inappropriate prioritisation and implementation of

projects

– Inappropriate allocation of company resources for

projects

Understanding IS/IT Costs




• Hardware- PCs, printers, modems and other hardware

including devices such as fax machines etc

• Software- licensing, purchase, upgrades, updates etc

• Installation- hardware and software

• Environment systems- Air-conditioning systems, fire

control systems,electrical etc

• Operational- electricity, telecommunications, staff

travel etc

IS/IT Costs Include…




IS/IT Costs Include…

• Maintenance- contracts, S.L.As etc

• Security

• Networking- cabling peripherals etc• Training

• Other organisational costs- salaries etc

• And more depending on your variousorganisational factors!!!




Problems With Estimating IS/ITCosts

• Two main problems encountered in this

regard

– Good estimates require detailed knowledge inadvance of the project

– Accurate estimates require historical data

which may not be available for new systems

• In addition lack of appropriate methods for

tracking IS/IT spend plague many

organisations



IS/IT Cost RecoveryMethods




Why Track IS/IT Resources?

• IS/IT resources are finite and used by entireorganisation and thus in short supply

• Tracking IS/IT resources;

– Provides continuity between planning and implementation – Establishes a mechanism to measure progress

– Forms a basis for managerial control

– Links IS/IT to goals of organisation

– Facilitates communication

– Provides information for objective performance appraisal




Benefits Of Cost Recovery

• Provides a basis for justifying IS/IT investments• Provides a basis for clarifying IS/IT benefits

• Facilitates communication between IS/IT dept and users

• Permits IS/IT dept to operate as a profit making business

i.e. no longer just a “cost centre”

• Increases general awareness of IS/IT cost/benefits to

organisation

• Highlights unnecessary expenditure

• Encourages effective/efficient utilisation of resources

• Improves IS/IT cost effectiveness




Charge Back Systems

• Cost recovery is typically through a

charge back system which should be;

– Easily administered – Easily understood

– Perform cost distribution effectively

– Promote effective use of IS/IT resources

– Provide incentives to change behaviours




Cost Recovery Methods

• Profit Centre Method – IS/IT unit run as a business within the business.

– IS/IT Unit has to make a profit

– Must generate revenue from services offered to users

within the organisation in excess of expenses incurred

• Cost Centre Method

– IS/IT unit must break even

– Amounts received for service rendered must equal

expenses incurred



Evaluating IS/ITProjects/Investments




Why Evaluate Your IS/ITInvestments

• Risk analysis - investing in IT presents a form of

business risk

• A lot of the benefits of IS/IT investments may only

accrue from future uses of a technology and not

from the initial implementation

• Dos Santos (1991) explains that organisation

impact of IS projects tend to be long term and are

often indirect, subtle, complex and multiple





• Changes in the way people work and the

organisational structure due to IS/IT may have

long term implications for the organisation• Investing in IS/IT alone is not sufficient to create

business value

• It is important to understand what both users

and IS/IT professionals expect from a project





• Lastly evaluation provides;

– Justification for investments in IS/IT

– An expenditure control mechanism – A tool for organisational learning (for future projects)

– To ensure that systems perform according to design

specs

– Determination of relative merits of different projectsas there will always be competition for scarce

resources

C P bl Wi h IS/IT




Common Problems With IS/ITEvaluations

• Ballantine et al (1996, p138) identified the following issues

– Information requirements

• Quantifying relevant benefits

• Identification of relevant benefits

• Quantifying relevant opportunity costs

• Identification of relevant opportunity costs• Identification of relevant costs

– Knowledge related

• Difficulty with interpretation of results

• Unfamiliarity with project evaluation techniques

• Calculation of discount rate

– Organisational problems

• Lack of time

• Lack of data/information

• Lack of interest




Reasons For Not PerformingEvaluations

• Reasons for non-evaluation of projects (Ballantine et al,

1996, p134);

– Projects required to keep business going (mandatory)

– Evaluation depends on a number of factors, e.g. size, value, risk

– Operational urgency does not permit time for evaluation.

– Some projects go straight to functional design i.e. no feasibility stage.

– Lack of importance of project or enthusiasm to carry out evaluation

– Evaluation depends on requirements and general support of key

personnel at the time

– Evaluation depends on how obvious the benefits are.

– Lack of organisational structure, i.e. no defined responsibilities.




Evaluating IS/IT Proposals

• Renkema and Berghout (1997) categorise

approaches to evaluating IS/IT investments

as follows;

– The Financial Approach

– The Multi-criteria Approach

– The Ratio Approach – The Portfolio Approach




The Financial Approach

• Methods in this category include the traditionalaccounting based methods for selection and

evaluation of corporate investments proposals

– Return On Investment (ROI)

– Payback Period

– Internal rate of return*

– Net Present value*

* The last two methods are normally referred to as Discounted Cash Flow

(DCF) methods as they take into account the time value of money.




The Multi-Criteria Approach

• Apart from financial consequences, IS/IT

investments have non financial

consequences

• Methods in this approach address the

problem of comparing financial and non-financial consequences




The Multi-Criteria Approach

• These generally function as follows; – A number of goals/decision criteria are generated for

each alternative

– Scores are assigned to each criterion

– Importance is determined by assigning suitableweights

– Final scores are calculated by multiplying weights and

scores

• Examples include; – Information Economics (enhanced ROI)

– SIESTA (refer to article)




The Ratio Approach

• The use of ratios such as, IS expenditures vs total turnover , as a

means of comparing organisational

effectiveness.• Examples include;

– Return On Management (ROM)

– IT Assessment




The Portfolio Approach

• Project selection criteria are plottedagainst several evaluation criteria

• Examples include;

– Bedell’s method

– Investment portfolio

– Investment map

* NB: See Renkema and Berghout (1997) for a detailed discussion and comparison of the various approaches.




Rating Of Various Measures

Bob Violino ROI in the real

world Informationweek, Apr

27, 1998

Results from an Information

Week Survey of 150 US

IS/IT Professionals



Understanding And

Determining IS/IT Benefits




• To understand the benefits one must first be

clear about the original objectives

• Some benefits are tangible and others are

non tangible

• Tangible benefits can be measured

• Non tangible benefits may require the use of

proxy measures in order to reduce them tomeasurable factors

Understanding And DeterminingIS/IT Benefits




In Summary Therefore

• Mirani and Lederer (1998, p3) advise that “…no single theory or measuring instrument should (or can) be

expected to capture all aspects and dimensions of IS

benefits in every circumstance. Rather, researchers

interested in acquiring a complete understanding of IS

effectiveness/benefits in a given context need to make

use of multiple tools that collectively address both user

and IS professionals perspectives, focus on individual,

system as well as organizational levels of effectiveness

and use different frameworks as underlying theoretical

base.”

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